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The Commercial Court has considered the appropriate standard of reasonableness in the context of a party withholding its consent to a request for early termination by the other party to a contract. The Court found that it had been commercially reasonable for a bank to refuse to consent to the early termination of three securitisations of loan portfolios entered into with another bank until it received five years’ fees.

Background

The dispute concerned three securitisations of loan portfolios entered into by UniCredit Bank AG (“UniCredit”), which were embodied in three deeds of guarantee, each of which provided for Barclays Bank plc (“Barclays”) to receive quarterly payments of premium and a fixed fee. Clause 12.1(b) of the guarantees stated as follows:

“If... a Regulatory Change occurs in respect of [UniCredit], provided that [UniCredit] has obtained the prior consent from [Barclays], such consent to be determined by [Barclays] in a commercially reasonable manner... [UniCredit] may ... [terminate the contract].” (emphasis added)

UniCredit sought consent for early termination from Barclays as a result of a change in their regulatory treatment, which was refused unless UniCredit agreed to pay Barclays the balance of five years’ fees (which amounted to EUR 82 million).

UniCredit declined to pay these fees and argued that Barclays’ insistence of payment of this sum was not a commercially reasonable ground for declining consent.

Issues

The dispute centred on whether or not Barclays had acted in a commercially reasonably manner in refusing to consent to the early termination. For this purpose, the Court considered what was meant by “commercially reasonable” in Clause 12.1(b).

The Court considered the case of Socimer Bank Ltd –v- Standard Bank Ltd ([2008] Bus LR 1304) which found that where one party to a contract had discretion to make a decision which may affect both parties, that discretion must be exercised honestly, in good faith and not arbitrarily, capriciously or unreasonably (reasonableness in this context being assessed in the Wednesbury sense, i.e. conduct or a decision which is not irrational).

The Court also considered the position under landlord and tenant law, as applied in the commercial context by the case of Porton Capital Technology Funds and others –v- 3M Holdings Ltd ([2011] EWHC Civ 2895 (Comm)), where consent was not to be unreasonably withheld, the question was not whether the decision was justified, but whether it is one which might be reached by a reasonable man in the circumstances. Further, the decision maker is entitled to take his own commercial interests into account, and these will take precedence over those of the other party.

Decision

The Court found that Barclays had acted reasonably. The parties had not meant, and ordinary businessmen in commercial agreements would not ordinarily mean or use the word “reasonableness” in the context as meaning Wednesbury reasonableness, as UniCredit contended; this was enforced by, but was not dependent upon, the use of the word “commercially” as an adjunct to Barclays’ discretion to act reasonably.

The Court concluded as follows:

Barclays’ determination of whether to consent to early termination had to be commercially reasonable, objectively speaking. It was not sufficient for Barclays to show merely that the decision was made in good faith and was not arbitrary, capricious or irrational.

The question was not whether the decision was justified, but whether a reasonable commercial man in Barclays’ position would have reached it.

Barclays was entitled to take into account its own commercial interests in priority to those of UniCredit in deciding what was commercially reasonable.

Barclays’ commercial interests comprised earning profits from its fee income under the guarantees and Barclays was entitled to refuse consent in order to protect that fee income unless its nature or amount was so disproportionate to UniCredit’s obligation to continue to pay that income that no commercially reasonable man in Barclays’ position could have reached such a decision.

Comment

This case highlights the need for clear drafting and careful consideration of exactly what discretion the parties want their counterparties to enjoy when it comes to the frequently used requirement for “reasonableness” as a caveat within provisions in commercial agreements.

It is also worth noting that despite the repeated reference to the term in the judgment, the word “commercially” was held only to reinforce the Court’s decision and was not critical to it. It is likely that where a commercial contract contains an obligation not to unreasonably withhold consent, in most cases a Court would follow the rationale in this case, and would favour the commercial interests of the party with discretion in deciding whether that party’s exercise of its discretion is reasonable.

Compare jurisdictions:Litigation: Enforcement of Foreign Judgments

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